Good morning and welcome to Carpenter Technology’s second quarter earnings conference call. My name is Caitlyn and I will be your coordinator for today. At this time, all participants will be in a listen-only mode. After the speakers remarks you will be invited to participate in the Question-and-Answer Session towards the end of this call. (Operator Instructions) I would now like to turn the all over to your host for today, to Mr. Mike Hajost, Vice President and Treasurer. Please proceed.

Thank you, Kaitlyn. Good morning everyone and welcome to Carpenter’s earnings conference call for the second quarter ended December 31, 2010. This call is also being broadcast over the Internet. With us today are Bill Wulfsohn, President and Chief Executive officer, and Doug Ralph, Senior Vice President and Chief Financial Officer, as well as other members of the management team. Statements made by management during this conference call that are forward looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter’s most recent SEC filings, including the company’s June 30, 2010 10-K, its September 30, 2010 10-Q and the exhibits attached to those filings. I will now turn the call over to Bill.

Thank you, Mike. Good morning everyone and thank you for joining for our fiscal year 2011 second quarter earnings call. During our last call I outlined in some detail my initial priorities. These included, one enhancing operational excellence, two improving product mix and three accelerating growth in the business. These priorities remain unchanged and the Carpenter team is aligned and active in each of these areas. From an operational perspective we’ve made great strides as we’ve reduced the number of safety incidents and reduced variable cost per ton. However, demand has outpaced our ability to add production shifts and train workers. Overall we are experiencing significant demand for our materials across all of our end markets. In particular, we’re pleased with the strength of the Aerospace engine market where we have increased our share position, and in the oil and gas sector where we recently announced a downstream acquisition and are seeing rapid growth. In the short term. this led to tight capacity across some of our critical operations. We are making progress, reducing these bottlenecks and we fully expect greater output in the second half of the fiscal year. Our actions in this area are critical to success, as increasing our capacity will help us to reduce lead times and bring in more profitable transactional volume. My second key priority is improving our product mix. Let me be very clear, we are not yet achieving the profit margins we expect to see in this business. Stepping back as we discussed last quarter, we took on lower value business during the down turn. With demand recovering, our plan is to increase margins by improving our sales mix and increasing our prices. You don’t yet see strong evidence of these actions in the second quarter, due to our long lead times.…

Thanks Bill. Before I review our second quarter results I’d like to make a few comments on our broader financial position and outlook. We expect to see clear progress in our operating income margin and EPS results over the next two quarters and we remain on track to achieve our financial goals for the full fiscal year. This includes continued strong volume and revenue growth, which we now expect to be in excess of 20% from year to year and above our prior outlook. Improving operating income and margin in the second half of the year behind higher volumes, mixed improvement, pricing actions and lower cost, an overall free cash flow for the year that is about neutral, excluding the Amega West acquisition. Our cash flow goals of about neutral, excluding Amega West will be the most challenging for us. Much of our higher inventory position and value is a function of our current business strength and the need to support growth of premium products in the second half. However, in certain areas we have built up excess inventory, which we are targeting to reduce over the second half. Our end of year cash flow result will also be influenced by other factors like the impact that May-June nickel prices will on our Accounts Receivable. Nonetheless we expect our inventory and cash flow performance to improve over the second half. Moving beyond this fiscal, we expect to continue strong top line and bottom line progress and have an internal plan in place to return to and then exceed our previous peak EBITDA level. While higher volume is a key factor in our profit improvement plan, it is even more important that we improve our profitability per pound. We have been taking pricing and mixed improvement actions during the year based…

(Operator instructions) Your first question comes from the line of Chris Olin of Cleveland. You may proceed.

Good morning.

Morning, Chris.

A lot of questions on this margin issue, getting weaker in the second quarter and I thought maybe it would be helpful if you got a little more clarity into the actual impact. Some of those issues had, the nickel accounting impact, the issue with this customer and also the outages. Can you break out what you saw that did to the margin or the results during the quarter?

The R&D tax credit effect for the quarter was worth about $0.04 positive, a mega transaction cost. The total amount of those is around $700,000 before tax and that's a little more than a penny. The customer requested volume shifts into the third quarter and that was on the premium side of our business. So that was worth a little more than a million dollars or a little more than $0.02 a pound. And then a couple of unplanned equipment outages that we had was worth the other penny. So in total, all of those were offsetting effects versus the first quarter margin level. While we had higher volume that was offset by a weaker product mix and one example of that, or illustration of that, is if you look at stainless volume as a percentage of our total revenue, it actually went up in the second quarter and we consider that a function of transition. And the fact that the customer requested volume shifts were on the premium side of the business, which contributed to that as well. And then the balance of the business was the additional business model affects from rising nickel prices that impacted us in the second quarter. When we file our Q one of the things that we always do when we talk about operating margin is to dimensionalize the affects that we have from either the raw material surcharge lag in our pricing mechanism, as well as the inventory affects and on an apples-on-apples adjusted basis, our margin was approximately leveled versus the first quarter and the second quarter.

Have you ever looked at timeline in terms of working off the commodity volumes you have and in the backlog in terms of when a 10% EBIT margin could be achievable? Do you have where you're priced at now?

Well, first of all, this is Bill. We think that we clearly do keep a very close focus on the materials that have been ordered and how they're working their way through our system. Lead times were between four and six months. They continue more or less at that level so it's taken a little while. Also, the customers in lower value end were good customers to us, especially in the down turn and we've been working with them to find alternative supply as we've been raising the price and exiting some, we'll say less attractive portions of the business. So the types of targets that you're talking about, we view in our very near term horizon because we're getting to the point now where this transition is in fact taking place. And the mix, we're realizing here in the quarter.

So, if I'm reading you right, within six months we could be back at that kind of profit level?

Well, we would in an adjusted basis we were higher than the reported 7.5% in the second quarter and we do expect to show clear progress in the upcoming two quarters into next fiscal year. And so that 10% level should not be a particularly great challenge for us as we look into our second quarter.

Understood and lastly, was there any impact within the channel related, the latest announcements from, all regarding the 787? Have you seen any kind of pause or are you preparing for something to happen in terms of inventory correction?

Well we have seen a pickup in our demand for titanium fasteners. In fact we're seeing that pick up rapidly to the point where it's close to the previous peak demand right now. And I think our customers are ultimately consuming that material for the 787, by expanding their production. Two quarters in the Aerospace industry is not really very far away for the supply chain.

Thank you.

Your next question comes from the line of Edward Marshall of Sidoti & Co. You may proceed.

Good morning. My question is kind of an extension of what was just asked of margins and kind of timing of the margins improvement, et cetera. And maybe if we could kind of look at the core business as a whole and when you get back to a certain level? Can we kind of talk about the individual segments, the AMO, the PAO and both what you kind of expect percentage terms for those two businesses. And if you can't answer that, maybe the incremental benefit of the AMO- business as it relates to the increase in the Aerospace fasteners that you're kind of seeing over the next upcoming quarters.

Sure Ed. So, our PAO margin has actually been reasonably steady for a while in the low 30% on an operating budget basis, excluding surcharge. It was a bit lower in the second quarter because we did have some of these impacts of customer requested ships out of the quarter and some of the business model lag affects that would affect that part of the business. But that one has been steady and we should see good growth at that steady margin level on PAO. Our margins on AMO have been running consistently around 5% on the same basis. Operating margin, excluding the raw material surcharge and we would expect that the results of our pricing mixed improvement actions and then the pick up of Aero fasteners would have an upward affect on the margins of the AMO business going forward.

Do you have an idea where you could see that margin progressing over the rest of the year?

I think the toughest part of that call is the fastener business and when that picks up. We have seen the pickup of that on the titanium side and on the nickel side sometime during the second half of our fiscal year; we would also expect to see that. All the channel checks from customer and all are going on. Some customers look like they're a little bit ahead of other customers there but I think that will largely be a function of when we see the pickup in the nickel base fastener business.

Can you kind of talk about the incremental benefits of the margin of the fastener business? What kind of margin will that flow through to kind of get, so we can kind of price that into our model somehow?

I think that ultimately if you go back and look at the company's reported results before the down turn and the AMO margins ran about half the level of the PAO margins. And that's not going to happen during the course of the second half of the fiscal year but as you look into your next fiscal year we ought to be on that path.

Okay and then on, just to be clear on the energy segment, it was a pretty good quarter there as far as the top line was concerned. There was nothing from the acquisition and that was all organic growth, right?

That is correct. The acquisition was completed at the very end of the year so we'll see those incremental sales in the first quarter.

Excellent. Any LIFO impact in the quarter?

Small. I mean you had the affect of rising raw material. The prices on what was building inventory. So that would have had some modest impact in the quarter.

Thank you very much.

Your next question comes from the line of Brian Yu of Citigroup. You may proceed.

Great. Thank you and good morning.

Good morning

Trying to reconcile a couple of statements that were made. I think Bill you mentioned that you guys were pretty well booked and you're turning away orders. And then Doug, part of the press release you mentioned that you built up excess inventories and those two don't really seem to go together. Maybe you can drill down a little bit and discuss the particular end market. Perhaps it didn't meet expectations and that was the reason for the inventory build?

Well there were a couple of areas we focused on building up some additional inventory just to make sure that we can provide the kind of responsiveness that's required to the customer. In the fastener areas, one area where we're anticipating a greater poll from inventory, so we've built up some stocking in advance of that. And also we've seen in other segments like the Aerospace energy, excuse me, Aerospace engine area that we built up some materials and that was in the area where the customers had a small push out into the third quarter, as they were trying to, our third quarter as they were trying to manage their working capital levels. And so those would be sales that we have already seeing but we would anticipate seeing enabling us to bring down our inventory as the year progresses.

Okay. Great. Thank you.

Your next question comes from the line of Steve Levenson with Stifel Nicolaus. Please proceed.

mentioned (audio gap) excess in inventory. Can you give us an idea what sort of materials those are?

It's primarily a work in process inventory and so as we've mentioned in our capacity is very tight in places. That's compounded by the fact that we've brought a lot of new employees on and so you have proficiency curve type of issues in the first half of the year. And so the primary area of inefficiencies that we see is just behind some of the work centers, what's built up in (audio gap)

What sort of, in the weaker dollar, what sort of hedging program are you using, if any?

We do hedge raw material risk and we have minimized the volatility of, I'm sorry the foreign exchange risk and have minimized the volatility of our foreign exchange impacts on our bottom line so that they are really negligible at the current, in the current state.

Okay. Thank you and what's, what percentage of your business is going now under long term agreements versus spot sales?

It’s still about 50-50.

And last could you give us some information on what’s going on in the powder metals area?

Well, we continue to see very strong demand for the powder metals business. We're very encouraged by our recent joint venture or ventures that we established with Sandbach and see a lot of growth and potential there. The overall opportunity in the nuclear market continues to grow as we've been able to pick up some business in the (inaudible) area, which is important to us. Important for our growth and profitability and ultimately we're in the position where this is one of those areas where we're looking at options to expand our capacity because of the emerging demand that we see.

And do you think powder metals will, I mean it may already be but do you see it as being your margin leader?

It certainly is in the premium margin category and we see that there's a great opportunity to increase prices over time as supply and demand really works to our favor.

Great. Thank you very much.

Your next question comes from the line of Gautam Khanna of Cowen. You may proceed.

Bill, you mention in your opening comments that you've increased your share position in Aerospace engines. Could you elaborate on that and could you also elaborate on whether you've seen any sort of order slow down out of Coulton Forge since the calendar year began?

Well we typically don't speak specifically about individual customers but we have signed several long-term agreements that have given us our greater share in the Aerospace market. And from the Coulton perspective, we have seen continued strong demand on their part. We haven't seen a slow down. We're still, I think an important supplier to them. We value them as a customer. As they move over time, potentially, to bring some of that supply in house, if that's an ultimate direction they pursue. We have a backlog right now that supports of course our sustained if you will full operations. But I think and they'll have to speak for themselves on this matter but I think the significant portion of their adjustment to internal supply has taken place over the last couple of years and so we're not seeing a significant move away from our product at this time. And again, we view them as a good customer and think we have a good relationship with them.

Can you elaborate on when might we see that, if it were to occur given your lead time, your order book now. How long are you booked through? Last quarter I think you said extending into April. Where do we stand now?

Hi, this is Dave Strobel. I'm responsible for Operations. We're taking order now for Aerospace (inaudible) out in the July timeframe.

Okay and can you talk about what you mentioned earlier. I think Doug mentioned that you're on the path to 15% margin of Amortize in fiscal '12 and what does that mean? A path in you'll actually get to that level if the fastener demand comes and the mix improves like you anticipate or on a path meaning we're somewhere between where we are now, 5% extra charge and like 15% at peak?

The way I would address that Gautam is that our objective is to return back to our previous peak level of profit and then ultimately beyond. I don't think we've ever characterized that as something that we would accomplish within fiscal year '12 but we would be showing good progress from where we are today through the second half of this fiscal year into next fiscal year. And that's a multi year process to get back to the peak level of profit and then beyond. And so the AMO component of that peak was where PAO margins are in that 15% neighborhood. We've been advised (audio gap) to peak in that part of the business and across our overall business.

And Doug, just to follow-up on that? I'm always perplexed when I look at consensus estimates in the first half of calendar ‘12; the second half of fiscal '12 implies something in the $0.86 range, $0.8425 range and exits the back half of calendar '11 in the $0.55 range. Is there any contract renewals? Is there anything that you can point to that would have such a massive sequential kind of uptick from Calendar Q4 of this year to Calendar Q1 of '012? Is there anything that we're just not mindful of, that I'm not mindful of?

Well. I think it all boils down to the four levers that we've been talking about. We would expect that our volume will continue to grow, grow into the second half of this year and then into fiscal year '12. Pricing and mixed management or mixed improvement efforts are the other two levers and so that will have bottom line impacts in the second half of this fiscal year and into fiscal year '12. And then our ongoing cost savings program is the other element of that and we've been successful over the last couple of years at reducing our variable cost per ton and we would expect to continue to be successful. And so those are really the four things that would continue to show improvement beyond the fourth quarter of this fiscal year.

I guess what I'm asking though is all those things you mentioned are gradual, with the exception potentially of price. Which can GAAP up at any give time. Is there something with respect to large contract renewals in calendar Q1 of '12 that could offer that pricing leverage? Everything else is gradual production around penetration cost management, things you could see leak through over the course of the year? It wouldn't explain a sequential uptick of that magnitude? Just help me, is there anything on contract pricing, re-pricing in Calendar '12 that would try such a (inaudible)?

No, there's nothing that we are anticipating in the way of a major contract that would kick in, in calendar year '12. Now we do have some parts of our business, like the Aerospace fasteners and the nickel and stainless part of the Aerospace fasteners that are clearly not back at their normal going levels. And so as that happens, that will help to some extent, the power generation sales and our energy segment is still not back to it's normal pass level so that's another thing that will help.

Understood. Thank you, guys. Appreciate it.

You're welcome.

Your next question comes from the line of Tim Hayes of Davenport & Company. You may proceed.

Good morning.

Good morning.

Just one question. We heard there's potentially going to be a third player in the titanium wire market. Is that starting to show or is that still a few quarters out from that third participant in that market?

Well we would see the impact, if there is any, being actually even further out than several quarters out. I say that because, as you can imagine there is a very high quality standard, a very long qualification cycle to ensure the kind of performance that's required in the industry. So we're always wary of competitors who are trying to make their way into our market space but we don't view this as an imminent threat.

And is it a potential threat when, if and when they do get qualified?

Well, we have a very strong position in the marketplace and the reason why we do is because we have very good quality, very good technology and very cost effective operations. And as long as we stay focused on those fundamentals, I think that we'll be strong. We'll put in an extra capacity to support the market growth and with that in mind, I think we'll be able to meet the needs. And this is a multi level supply change, so there is an immediate customer who we sell materials to but also a direct supply coming from the OEM's and we are sustaining what I think is a very healthy relationship with them as well. So again it's always something we need to be cognizant of but we feel very strong and we believe our position is very sustainable.

Okay. Thank you.

Your next question comes from the line of Mark Parr with KeyBank Capital Markets. Please proceed.

Good morning. It's only like 30 degrees in Cleveland today so. I wasn't just sliding all over the roads to get to work. Anyway, I had a couple of questions. The, first of all, I heard your commentary about getting back to that, call it round numbers. $350 million in EBITDA level is certainly an important observation. And I guess part of the achievement of that will be a shift from some of the lower value shipments into some of the higher value mix that you are currently putting into the backlog. And maybe instead of asking you about numbers versus, could you talk a little bit about this process and how you see it unfolding over the next, call it six to 12 months?

You're talking about the respective trade up of the mix?

Yes, how was that, how should we think about that mix unfolding here over the next 12 months? (inaudible)

(inaudible) a year, year and a half ago there was an effort to keep ourselves as fully deployed as we could. And so as we've talked about, we've brought on some of that material which was at a lower margin. Now as we've seen constrains built in different parts of our operations we've been very specific about looking not only at the bottleneck in those but also at the materials going through those centers. And we actually go through a process where we look at the profit velocity based upon residence time. And constrain pieces of equipment. We study those even those sometimes even though it may not be what we're looking for. There's a strategic reason because we supply a broad package to a customer but in many cases and what we call the tail or the lower end, we recognize that it's just not a business we're likely to benefit from in the long run unless we get the pricing up which is the first option with the customers or the second option is to ultimately transition supply. And so we've been working this process in a very coherent way over the last, we'll say four months or so and I say the last four months because up to that point you really didn't have the need to kind of make trade offs one customer to another, as we have excess capacity. And the backlog built on us very quickly. So we have very formalized action trackers and we've walked through the specific actions and the timing of those and it takes a little while because of the orders we've taken but that's why we remain confident. As the year rolls on here we're going to see good benefit of these efforts.

All right. So this is a process that you, that really began four months ago. And now you're into it and so we would expect to see kind of the first evidence of real mix shift, call it, back to your previous mix in the ’06 to ’08 time frame, over the March and June quarters, is that what you’re trying to suggest?

Yes, it's absolutely our number one priority and we have a lot of action, a lot of focus and we go through our process where we build up our projections from the inside, from the ground up and we believe that we'll be able to demonstrate evidence in this area.

Okay and then another question just to kind of follow on to that. You did, I do believe you made some formal commentary about your volume growth expectations for the fiscal '11 year and that was in a positive direction. I mean is there anything that you can share from an EBIT perspective that would correspond to the increase in volume shipment expectations for fiscal '11? What I'm asking is internally are you looking for better earnings on the improved volume momentum?

Well the answer is clearly yes on that one because we'll be getting as some volume leverage on our sales as we get more tons or pounds out the door. Then the second is we do see a better mix from within businesses as well as across businesses as we migrate from one mix to another. So yes, we do expect to see EBIT leverage on the volume growth.

All right and then just one last point of clarification. Would this increase exclude the Amega West acquisition or how does Amega West, how do we think about Amega West from an EBITDA perspective? As you look at the prior peak levels of around $350 million of EBITDA. I mean, what does this facility or this operation have the potential to contribute?

We bought a business Mark, that has EBITDA at a little under $10 million and so it would just be a $10 million to add to those previous peak levels. However, we purchased the business because we see significant potential to grow and expand and we hope that this is just one move of several that will allow us to grow our scale and scope there but also to introduce a better mix of products as we work closer to the customers and can push forward some of our efforts in that area.

Okay and then if I could just ask. Again, I hate to keep pushing on this bottom-line thing but unfortunately that's what I'm supposed to do. I mean, is a $350 million EBITDA number conceivable for fiscal '13? I mean is that in your planning horizon? I'm not asking you to give a forecast but I mean is that something that we should be actually thinking about?

Well, I can say that there's lots and lots of execution required to get there but that that is the type of target that we are targeting for ourselves.

Okay. That's really; I really appreciate the color on the bottom line and congratulations on the revenue recovery. That was really encouraging in the December quarter. I think the markets a little discouraged about the bottom line result but certainly sounds like things should be looking better here in the March and June quarters so I’m looking forward to next quarter. Thank you very much.

Thank you.

Your next question comes from the line of Dan Whalen of Capstone Investments. You may proceed.

Great. Thank you. You know a lot of my questions have been answered but just, not to beat this down but just the mix issue. Looking at your current inventories work in progress and your current lead times, is there a way, not to oversimplify it, if we could kind of break it down looking at standard value and high value? Any kind of incremental mix shift? Is it a 5% to 10% incremental shift in the next quarter or two or is it something much greater than that? Any color you could give from a more simplistic basis?

Well, there might have been more than one question there so I want to make sure I address them but we have seen the number of tons in inventory grow and we've also seen the value per ton grow. And they, both of those components are major contributors to the increase thus far this year. As we pick up our sales through the remainder of the year, we're not anticipating that we'll need to build further inventory in support of it. In fact we're targeting the opportunities to reduce inventory in that context. And of course when you have a more premium inventory value you expect that you’ll have a richer, more premium sales mix thereafter. So, I don't know if that answered your question. I hope it did.

Okay. Yes, I was looking for anything, I guess incrementally for the next quarter or so just in terms of the mix improvement? If it's 10%, quarter magnitude or maybe just too difficult to pin it down from that perspective?

Yes, we report our results by product types, special alloys, titanium products and stainless products and so you should certainly see evidence in the growth rates in those product lines of the improvement in mix over the second half of the year.

Fair enough and then just lastly you mentioned revenue of 20 plus percent. Is that assuming a relatively flat nickel price or how are you guys thinking about that?

We would always quote revenue excluding any effect of raw material surcharges so that's independent of what happens with nickel prices or revenue excluding surcharge that we report.

Okay, great. Thank you.

You're welcome.

[Operator Instructions] You have an additional question from the line of Brian Yu of Citigroup. You may proceed.

Thanks. Just want to follow-up on the top line guidance. You said that you expected 20% volume growth this year and when I look at your pretty impressive numbers this quarter and annualize it, it seems like the volume numbers are already there so is it fair to say that we’re going to stay at the three million ton run rate for the rest of fiscal year?

No, we would expect our volume in the second half of the year and the revenue in the second half of the year to be in excess of what it was in the first half of the year.

Okay and then on this question about margins. I think last quarter there was discussions about a couple base price increases, 5% and then 3% to 8%. If we assume that these price increases are sticking and that impacts about 50% of your business which tends to be transactional, is it reasonable to believe that your AMO margins could go up by roughly 500 basis points in the back half, just using those rough numbers?

Yes. Without getting real familiar with your math, I wouldn’t say that we would expect that just based on pricing but certainly we would expect to see the results of the pricing actions that you mentioned, including the ones that we have taken on the tally business reflect through to the bottom line of the second half of the fiscal year. And that will lead to margin improvement in the second half of the year, in addition to our mixed management efforts, as well as the eventual recovery of businesses like the Aerospace fastener business.

Okay. Thanks.

You're welcome.

You have an additional question from the line. Pardon the interruption, the caller has dropped out of the queue. I will now turn the call over to management for closing remarks.

Well thanks for participating in our call this morning. As you can tell we are very excited about the prospects for our business and the growth opportunities in front of us. In the short term however, we remain laser focused on executing to achieve higher margins, of a combination of these facts will enable us to achieve our goals of reaching and then exceeding prior peak earnings. Thank you again for your continued interest in and support of Carpenter Technology Corporation. I hope many of you will be able to attend our investor day event in New York City on February 16. Regardless, we look forward to speaking with you again next quarter. Good bye.

Ladies and gentlemen, thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Have a great day.